Category Archives: Setting Economic Priorities

Fiscally Responsible Italy

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Lawrence Kotlikoff writes,

As for Italy, its fiscal gap of negative 2.3 percent is the lowest of any of the 24 included countries. Indeed, Italy can spend almost €180 billion more and still be able to meet all its expenditure obligations. The source of Italy’s long-term fiscal solvency is its two major pension reforms that have dramatically reduced its pension obligations. In addition, Italy has strong control of its health care spending.

Pointer from Greg Mankiw.

This is why accrual accounting would be an improvement. Under the present system, politicians have an incentive to run up their debts in the form of obligations in pensions systems. By not using this trick, Italy managed to be fiscally responsible.

The Most Renegade Bank

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Michael Grunwald writes,

That bank currently has a portfolio of more than $3 trillion in loans, the bulk of them to about 8 million homeowners and 40 million students, the rest to a motley collection of farmers and fishermen, small businesses and giant exporters, clean-energy firms and fuel-efficient automakers, managed-care networks and historically black colleges, even countries like Israel and Tunisia. It has about 120 different credit programs but no consistent credit policy, requiring some borrowers to demonstrate credit-worthiness and others to demonstrate need, while giving student loans to just about anyone who wants one.

Read the whole thing.

Another excerpt:

When the U.S. government simply spends money to do stuff, it’s usually clear how much the stuff will cost to do. But that’s not true when the government lends money or guarantees loans by private lenders.

One idea I had for setting national economic priorities was to use scenario analysis to try to expose the risks in these programs. From a taxpayer perspective, this opacity is a bug. From a political perspective, of course, it’s a feature.

Will the Swiss Support a BIG Welfare State?

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From Newsweek,

Despite tentative bipartisan support for basic income in the U.S, the concept has gained greatest traction outside America. Switzerland has become the first country to hold a referendum on basic income at a national level; in 2015, the Swiss Parliament will vote on whether to extend a basic income of 2,500 Swiss francs (about $2,600) per month to every Swiss resident.

The article discusses radical versions of the Basic Income Grant for the U.S., in which $15,000 per household would be provided instead of Social Security as well as means-tested programs such as food stamps. It was hard for me to tell whether Medicaid would have to go, too. One commenter even thinks that Medicare would be axed to help pay for the income grant.

Anyway, although political judgment is not my specialty, it seems to me that tying a basic income grant to getting rid of Social Security would make it much harder to pass.

Meanwhile, if Switzerland pulls it off, it will be another victory for small states having better government/

Budget Uncertainty

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CBO Director Elmendorf writes,

in some situations, legislators might want to adopt policies with a smaller variance of budgetary effects in order to reduce the risk of large fiscal problems. For example, understanding the extent of uncertainty about future federal spending that arises from uncertainty about lifespans might affect whether policymakers want to index eligibility ages for certain programs to lifespans.

Pointer from Mark Thoma.

A couple years back when some CBO staff invited me to have a discussion of their work, I gave two complaints. One was that their macroeconomic forecasting was treated as “scoring” by the public, and I thought that they needed to make clear the tenuous nature of macro modeling. The other was that I thought that they should be augmenting point forecasting of the budget with scenario analysis.

I think that reporting a number like “forecast variance” would not be helpful to politicians. However, reporting what would happen under particular scenarios, such as increased longevity, higher interest rates, or lower house prices, could be very useful.

A Postal Service for Spectrum?

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Richard Bennett writes,

I propose the creation of a Federal Spectrum Service to address these issues. The FSS could be chartered as a corporate entity distinct from the government with a specific mandate, similar in concept to the Postal Service. The FSS’s charter would focus on the overriding goal of reducing the federal spectrum footprint by 50% over a five-year period, and then reducing it a further 50% over another five-year period.

Pointer from James Pethokoukis.

Nowadays, a large share of the available underutilized spectrum is controlled by government agencies, so this proposal may be on the right track. My own thinking was that we should privatize all of this spectrum, and then force the government agencies to lease it back. My rationale is that the government agencies might have to think about using spectrum more economically if they have to pay for it. But perhaps they would not show much price sensitivity.

The 2017 Project

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The mission statement:

Neither a think tank nor an electioneering organization, we operate in the middle ground between policy and politics, seeking to make things happen by taking ideas and helping to put them into action. We believe that a principled yet prudent conservatism that gears its efforts toward the well-being of Main St. Americans can unite a wide range of citizens, from the Tea Party to the centrist independent, who are looking for an antidote to big-government liberalism. In that spirit, we are working to advance a conservative reform agenda that will secure the blessings of liberty and promote the happiness of the citizenry.

Pointer from Greg Mankiw.

This looks like it is in the spirit of my idea of Setting National Economic Priorities, which is still vaporware. Their initial work seems to be on replacing Obamacare.

If I were doing Project 2017, I would prefer to replace Obamacare en passant, as part of a larger effort to get rid of the uncoordinated set of means-tested programs. That is, I would use multi-purpose savings accounts to replace most forms of government assistance, including food stamps, Medicaid, housing subsidies, and so on.

The Federal government would contribute to these savings accounts a cash amount of, say, $3000 per adult and $1000 per child. However, this amount would be reduced by 20 percent of household income. So, if a family of four had an income of $30,000, it would receive $3000+$3000+1000+$1000 minus $6000 (20 percent of $30,000), or $2000.

Some further thoughts.

1. State and local governments could provide additional assistance.

2. Households could only spend these savings accounts on “merit” goods, meaning food, medical care, child care, housing, and education.

3. To induce households to buy health insurance, they would not be allowed to spend any of the money in these savings accounts on anything other than health care until they can show that they have a catastrophic health insurance policy.

Smart Grid Problems

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From the NYT,

Although the goal is to shift consumption to off-peak hours when cheaper, cleaner electricity is available, experts say it is still many years away, despite billions in federal subsidies that have helped finance the switch to the so-called smart grid.

Pointer from Tyler Cowen.

The article ends with a quote from an official in Maryland’s Office of People’s Counsel.

“I’ve never seen an analysis that shows that shifting my dishwashing, clothes-washing and clothes-drying load is going to make a significant impact on my monthly bill,” he said. “It’s just not that much electricity.”

I do not find this statement persuasive. Perhaps he needs to be charged more for use of electricity at peak times in order to get himm to understand the concept of dynamic pricing.

Government’s Cost of Capital

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Deborah Lucas writes,

Collectively, government investment and insurance operations dwarf those of the largest commercial banks. The size and scope of activities have grown over the last several decades to include the explicit and implicit guarantees of too-big-to-fail private and international financial institutions and non-financial firms, direct and guaranteed loans, and more traditional insurance and guarantee programmes such as for bank deposits.

She adds,

a universal mistake is that governments take their cost of capital to be their borrowing rate, irrespective of the risk of the investment under consideration.

Pointer from Mark Thoma.

Ever since the Basel Capital accords were adopted, the government in effect dictated that private bank loans must carry a risk premium over government bonds. Along with that, you have the mistake that Lucas identifies, which is the government evaluating its own loan guarantees and investment projects at a risk premium of zero.

Here is where this leads: if a private firm has to earn 8 percent interest to undertake a risky construction project, but the government can borrow at 2 percent to undertake that same project, then if that project is undertaken at all, it will be undertaken by the government rather than by the private sector. Thus, the system is rigged to put government in charge of where investment takes place.

We end up with something close to the worst of all worlds. Owners and managers of nominally private financial institutions earn outstanding returns. But we have capital allocation that closely approximates what would result from a socialist system.

Casey Mulligan on Obamacare Tax Effects

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He said,

In summary, the ACA has three major taxes in it. Two are taxes on full-time employment and the other is a tax on income. They may be implicit, they may be hidden, politicians may not call them taxes, but that’s what they are. Their economic impact on workers varies widely, affecting low-skill workers the most. They create all kinds of productivity problems and will have visible and permanent effects on the economy. I have estimated that employment will be three percent less over the long term because of the ACA, and that national income—or GDP, if you like to think of it that way—will be two percent less. If you look at the productivity costs alone—forgetting the fact that there will be a number of people not working anymore—they come to $6,000 per person who gets health insurance because of the law. And I’m not beginning to count the payments needed for health care providers.

Pointer from Don Boudreaux.

The End of Wallets?

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Joshua Gans writes,

the main reason I carry a wallet is not because of convenience per se but because it previously represented the way by which I would be identified. Possession was my credo. Having cash identified that I had done something legitimate to acquire that cash and a right to acquire more goods and services with them. Having a card allowed my bank to verify that I had those rights. Now, I could do the same with just a phone. Moreover, the retailer wouldn’t need to do anything other that see an acknowledgment that the ‘black box’ had accepted my credentials.

Imagine a world in which you use biometric ID to authenticate yourself to your phone or watch. In principle, then, you do not need any other forms of identification to enter your work building, purchase something, confirm your identity to authorities, and so on.

Note that I would like the Multi-purpose Savings Accounts (my current name for my negative income tax proposal) to incorporate this sort of technology to the extent possible.

Some questions:

1. What would this do to illegal immigration? Would there be a way to give someone a phony social security number or other ID?

2. Would the potential to use technology to prevent voter fraud be permitted to be used?

3. How dystopian is it for people not to be able to hide their identities?

4. As commenters here have pointed out, your “biometric ID” ultimately is represented as a string of bits. What sort of security system would you need to address this?

5. Do you think people would be able to get along without digital ID, or even be permitted to do without?

Feel free to ask your own question.